UK runway decision, a beginning and not the end of the process

15 / 09 / 2016

A UK government decision on a new runway to be built at either Heathrow or Gatwick will not push a magic button for extra capacity. Many more potential obstacles stand in the way.
Who will pay the full cost of providing extra capacity and when are two thorny issues. Alongside those is a probable legal challenge from the losing airport, plus environmental concerns from local residents and councils, added to investor qualms over the commitment of a future UK government in honouring the infrastructure decision by a predecessor.
Those were just some of the issues raised at the Westminster Policy Forum’s conference in London: What now for airport expansion in the south east?
Richard Moriarty, director of consumers and markets and deputy chief executive at the UK’s Civil Aviation Authority (CAA), said that the decision – expected to come in October – is removed from the mechanics of regulation and is “rightly a political decision”.
The CAA, neutral in the debate, recognises that the economic and consumer case for expansion is “compelling”.
Said Moriarty: “Without [additional] capacity, passengers are likely to face higher charges, fewer routes and, most importantly, more disruption in their services as the London system becomes ever more congested.”
He added that the CAA’s economic regulation role starts in earnest once the government has made a decision on its preferred location: “Put simply, we work out how the new capacity should be paid for in the landing charges that the airport levies on airlines. This often involves us pitted in the middle between the airports and airlines which usually have sharply conflicting views on this matter.”
He likened the CAA’s burdensome role to financial mediation or “corporate marriage guidance counselling”.
Moriarty continued: “Our primary objective is really focused on the end user, the passengers and those who own the rights in cargo, not just those using the airports today but those using the airport in the future.
“That is important when you are dealing with investments that are measured in decades rather than years, and we want to make sure that they get value for money and get access to a range of reliable services at appropriate quality at an efficient cost.”
The CAA’s regulatory framework must provide incentives for private capital to finance a new runway at either Heathrow or Gatwick, while investors’ views on the future regulatory model “will play a critical role in how they evaluate risk and reward from making such an investment”.
Long term investment requires “regulatory certainty, transparency and predictability”, he said.
Although there will be a host of regulatory issues over a new runway, Moriarty focused on three.
“The first issue we are discussing with airports and airlines is planning cost. Airport investors need to sink considerable investment in the planning process before a planning decision, and this could be measured in hundreds of millions of pounds.
“A key question they are asking us at the moment is what happens if we spend all this money and later on down the track, maybe 2020 or beyond, there is a change in government policy? What happens to these costs that we have spent?”
Most airports, said Moriarty, would like 100% of those costs recovered through charges. Airlines take a different view and want the costs treated as corporate or commercial investments and written off, with zero cost recovery.
Moriarty, with a nice line in understatement, observed: “With those diametrically opposed positions our policy conclusions are unlikely to please everybody.”
A second key issue is the timing of when airlines will pay increased landing charges for the additional capacity. Airports want that to be sooner rather than later, i.e. before the runway is open for business.
“This helps lower the cost of capital, it lowers the life cost of the project, and it smooths out the profile of prices over time,” said Moriarty, who added that this mechanism has been used to finance some very large infrastructure projects in the past, including Heathrow Terminal 5.
But some airlines using the airport today are “very concerned about this pre-funding type of model because they are anxious that it might undermine the incentive of the airport to build it sufficiently if they receive a large share of the revenue up front”.
In addition, carriers are also anxious that they, in effect, will be funding capacity expansion that will be used in practice by new entrants and competitors in years to come.
“They are concerned that the way that the current [aircraft take-off and landing] slot regulations work in Europe does tend to favour new entrants for this type of capacity.”
Moriarty continued: “So our work will need to determine whether this type of pre-funding model is necessary and so what the minimum requirement is and what pre-conditions should be attached.
A third key issue is that the extra capacity is built as efficiently as possible, ensuring that consumers get the capacity built in a timely way without paying excessively high charges.
“Whether it be Heathrow or Gatwick, the numbers and scale are simply huge. For instance at either airport this investment project will more than double its accumulated historic capital base so we cannot just treat it as business as usual.
“We will strongly encourage the airports and airlines to work on a master design and also to engage with local communities and stakeholders in the process.”
He concluded: “If there is a decision, it will not be the end of the process for politicians and, some may argue, it is just the beginning.
“Getting it announced is one thing and that will require a bold decision, but to actually get it built in practice many years hence, that will require strong, consistent and ongoing broad based political and policy support for years to come.”